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Fed Cuts Rates by 75 Basis Points - Best Savings Strategies in this Environment?

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The Fed cut the funds rate by 75 basis points to 2.25%. The futures market had priced in a 100% chance of a full percentage point cut, so it could have been worse for savers. Two of the Committee members voted against the cut. Inflation worries are slowly being appreciated by the Fed. From the Fed's statement:
Inflation has been elevated, and some indicators of inflation expectations have risen. The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization. Still, uncertainty about the inflation outlook has increased. It will be necessary to continue to monitor inflation developments carefully.

The next Fed meeting will be on April 29th, and the futures market is already predicting another half-point cut.

We'll see how fast the banks will respond to this rate cut. I'm afraid most savings account rates will be below 3% in the next month or two. The last time the funds rate was 2.25% was in late 2004 and early 2005. That was the time when EmigrantDirect was launched with its 3% savings account. At that time ING Direct was only offering 2.35% APY so this 3% caused some excitement.

If you want to earn more than 3% without risk over the next year, your best bet would be CDs. Alliant Credit Union still has the best 12-month CD deal with a yield of 4.90% APY for a $25K minimum deposit. For banks, Indymac has the best deal with a yield of 4.05% APY. I doubt these will last much longer, so be sure to act quickly. For more CD rates and links to my reviews, please refer to my last weekly recap of CD rates.

Another possible way to earn over 3% without risk in the next year may be in high yield reward checking accounts. Rates have been going down on these also, but not as fast as savings account rates. There are still many reward checking accounts with rates of around 6%, and many of these have maintained this 6% for over 8 months. I'm sure we'll see more cuts in the next few months, but I still think there's a chance that many will be able to keep their rates one or two percent above the average online savings account rate.

By the end of this year we should know if these reward checking accounts can really compete over the long term with the online savings accounts. The two main issues with reward checking are the balance caps and the debit card usage. These may be deal killers for some, but they are also the factors that help the banks keep the rates high. For the latest reward checking accounts, please refer to my last weekly recap of the reward checking accounts available nationwide.


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